In the second of our a two-part blog series, FAI affiliate Daniel Rozas continues his discussion of housing microfinance and his experience with the Citi-Habitat Home Improvement Microsavings Pilot Program. If you missed it, you can read Part 1here.

The irresistible force of commitment savings met its immovable object. In every pilot, the products rarely moved off the shelf, and when they did, it was for reasons other than the value of the product itself.

The most interesting pilot was the one that was least successful, at least outwardly. At Cantilan Bank, a rural bank in the Philippines island of Mindanao, was arguably among those best positioned to succeed in the pilot. Using their long-standing experience working with the poor communities in the area as well as experience with small savings (targeted at parents and relatives looking to save for their children), Cantilan was closely engaged in developing the housing microsavings account.

It seems they hit upon a real need – client response to the initial marketing was high, with 125 clients from the two pilot branches coming the financial education sessions that delved deeper into the product and helped them design the appropriate savings schedule based on their planned home improvement. But not a single client opened an account. A year later, some of these 125 clients were subsequently invited to a focus group to share their thoughts on the housing microsavings scheme. Over 20 clients showed up, suggesting continuing pent-up interest in the product. Where was the disconnect?

This was not a problem of lack of trust or poor implementation. Cantilan Bank is a mainstay of the local community and its staff was well trained in the new product. The problem was more fundamental. Among the women who had attended the financial training sessions, a common home improvement cost was between 15-20 thousand pesos ($340-$450). Even when extended over a period of 18 months, this means monthly savings of approximately 1,000 pesos ($23) – 8.5% of per capita monthly GNI in the Philippines. In this poor, rural part of the country, that is a steep commitment.

Yet the amount was not unreasonable. The deposit amount is similar to the monthly group loan payments of many Cantilan clients. Indeed, one focus group consistent entirely of a borrower group. several of whom had used Cantilan loans to fund home improvements. In another group, a woman had just recently upgraded her roof to the corrugated sheeting she’d planned to save for at the time of the financial education sessions. She did this by the traditional method of buying a few sheets at a time, when she had cash available. Without realizing it, in the course of a year, she had thus saved up the very 15,000 pesos she was afraid to commit to through a savings account.

To gain a better understanding of how these two commitments – savings and loans – were perceived, the focus group participants were presented with a hypothetical option to save 12,000 pesos by setting aside 1,000 pesos each month, or getting a loan of the same amount and making monthly payments of 1,300 pesos for the next 12 months (to simulate the added interest payments). Though they readily recognized that saving was cheaper, they largely preferred the loans for home improvement. One client put it this way: “With a loan, I know I will pay!” – leading to nods of agreement from others. With savings, they knew beforehand that they would fail to reach their goal.

The problem with home improvements is that they are expensive, requiring large amounts to be saved over a lengthy period. Meanwhile, commitment savings tend to be relatively small and rarely cover periods of more than a few months.

Committing to save requires reasonable certainty that the commitment can be met – and the sheer size and length of commitments needed for home improvements makes the goal seem unattainable. Meanwhile, the self-obligation in commitment savings isn’t quite as strong as the obligation undertaken with a loan – no amount of reminders, commitments, or incentives can approach the degree of compulsion that comes with loan repayments, where delinquency brings on social pressure from group members, a damaged credit history, or even the threat of legal proceedings. That’s the ironic truth embedded in those simple but highly revealing words: “With a loan, I know I will pay!”

Yet credit is not the only, nor even the largest, source of funding home improvements among the poor. The strategies deployed were readily apparent in just these few pilots. In rural Thailand, the primary vehicle was to use revenues from the harvest – the large lump sum perfectly matches the high one-time investment needs of housing. Others relied on remittance income. But perhaps the most commonly deployed tactic was the one described by the woman who bought roofing sheets a few at a time, storing them until she had accumulated enough to replace her roof.

These roofing sheets were in essence, a savings vehicle with 100% commitment – once purchased, they cannot be repurposed, nor can they be realistically sold. To explore this idea, we proposed to the focus groups a financial representation of the approach – allow them to buy stickers in the form of common building materials (roofing shingles, cement blocks) and affix them to a picture of a home they would receive upon opening the account. Once the picture was completed, they could trade it in for the supplies in question, receiving some free supplies as bonus (via bulk purchase discount).

The focus groups found the idea intriguing – besides the bonus, it also avoids the risk of damage or theft in the interim. However, they resisted to make this a locked account, insisting that they should be able to access the funds in the event of an emergency. It seems that the mental model of an actual physical good – symbolizing money already spent – cannot really be approximated by a financial device, which regardless of the underlying contract or commitment, is seen as money saved, but not yet spent.

Such a product is just one, untested idea. Effective housing finance will require much deeper understanding of the behavioral economics of poor families and a rethinking of how microfinance institutions are structured to serve the poor. Housing finance is the single largest segment of household finance in wealthy economies, yet it barely registers in the financial inclusion agenda.